Spanish bonds rallied this week, in spite of a political impasse sending Italian yields to a three-month high as investors bet the European Central Bank will prevent a fresh debt crisis in peripheral bond markets.
An inconclusive election in Italy sparked concern lawmakers will fail to form a government, hampering the progress of austerity measures put in place by the previous administration. Yet as Italy’s 10-year yields climbed to a three-month high, those on Spanish, Greek and Portuguese bonds fell on speculation the ECB will support Italy if borrowing costs surge to unmanageable levels.
“The political uncertainty in Italy is a real risk but investors seem to believe that when push comes to shove, the ECB will save the day,” said Robin Marshall, London-based director of fixed income at Smith & Williamson Investment Management Ltd., which oversees $19 billion. “Perhaps that explains why the Italian impasse hasn’t had much of an impact on other peripherals’ bonds. Investors are getting a bit more savvy in assessing individual credit.”
Spain’s 10-year yield fell five basis points, or 0.05 percentage point, over the week to 5.09 percent at 4:48 p.m. London time yesterday. The 5.4 percent security due January 2023 rose 0.410, or 4.10 euros per 1,000-euro ($1,298) face amount to 102.34.
Italy’s 10-year yield rose 34 basis points to 4.79 percent. It advanced to 4.96 percent on Feb. 27, the highest since Nov. 15. The yield on similar-maturity Greek debt was 11.02 percent, down five basis points on the week, and Portuguese two-year rates slid five basis points to 3.32 percent.
Italian 10-year yields posted their biggest intraday jump since December 2011 on Feb. 26 after the elections delivered a four-way parliamentary split. Pier Luigi Bersani, the top vote winner, has resisted any collaboration with former Premier Silvio Berlusconi and said he would seek to hammer out a compromise with lawmakers elected under the political movement of former comic Beppe Grillo. Berlusconi yesterday called for new elections to be called as soon as possible.
ECB President Mario Draghi unveiled the institution’s bond-buying plan on Sept. 6, pledging to spend as much money as necessary to restore confidence in the markets if a member nation requests help and signs up to economic reforms.
Even as some investors shrug off the risk of contagion to other euro-area bonds, the region’s lawmakers and officials have warned Italy must find a solution to its political stalemate.
Failure to commit to responsible fiscal policies may reignite market turmoil and result in losses that would be “too terrible,” Finnish Prime Minister Jyrki Katainen said in an interview in Helsinki on Feb. 28.
German lawmaker Klaus-Peter Willsch said if a majority of Italians cannot be convinced to stand by European Monetary Union rules, they must be allowed to return to their own currency.
“The Italian election is a wake-up call,” said Marchel Alexandrovich, a senior European economist at Jefferies International Ltd. in London. “The political uncertainty there just reminds the market of implementation and systemic risks still facing the euro area.”
Bersani told la Repubblica that he ruled out an alliance with Berlusconi and he plans a program of reforms to attract votes from all political parties.
A broad coalition government including Berlusconi’s People of Liberty party “would be the death” of the Democratic Party, Bersani said. “The hypothesis of a broad coalition doesn’t exist and will never exist,” he said.
The additional yield investors demand to hold Italian 10-year bonds instead of similar-maturity German bunds widened 10 basis points to 338 basis points. The so-called spread expanded to 351 basis points on Feb. 27, the most since Dec. 11.
“We don’t know what will happen next about this election, but one key development that is very important is that investors recognize this is a problem of one country, and that’s Italy, and not the region,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit Global Research in Milan. “Perceptions of risk have changed because there’s more commitment from the top to safeguard the euro.”
Benchmark bunds rose yesterday, pushing 10-year yields to the lowest in eight weeks on Feb. 27, as euro-area reports showing unemployment climbed to a record and manufacturing shrank boosted demand for the region’s safest securities.
The rate on German 10-year bunds slid four basis points to 1.41 percent yesterday, for a 16 basis-point weekly slide. Finland’s 10-year yield dropped 16 basis points in the week to 1.60 percent.
German government securities returned 1.3 percent last month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities dropped 1.9 percent and Spain’s rose 0.8 percent.